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401(k) debit cards: Borrowing from your future?

Plan offers easy, but perhaps not wise, way to spend retirement fund

By John Morell

Are you cash poor this month? Looking for a quick money source that doesn't involve payday loan brokers or an embarrassing call to friends and family? 401(k) debit card

Answers could be coming soon from your employer's human resources department in the form of a special debit card that allows you to access the funds you've saved in your 401(k). Known as the ReservePlus account, it works like any other type of debit card -- and that's what worries consumer advocates.

How 401(k) debit cards work
After your bosses sign up for the service, you sign up for an account that is based on limits set by your employer and how much of your 401(k) contribution you want to make available. This amount becomes your credit limit and you can use the card to access cash at ATMs or in sales transactions. You receive a statement showing how much you've deducted and how much you'll have to pay each month.

Each time you use your card, you have 60 months to pay off the amount you've borrowed from your 401(k). The interest rate is 2.9 percent above the prime rate, which at today's rates, would set the annual percentage rate at a little more than 8 percent.

Cashing in on your future?
While Reserve Solutions, the New York City company behind the plan, promotes its ease of use for employees and human resource departments, the concept of borrowing from your retirement fund is heresy to many financial professionals.

"It blows my mind that, now that we've allowed people to go through all of their home equity with credit cards, we're going to let them do the same to their 401(k)s" says Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group in Washington, D.C. "When you're spending your future now, you're not going to have a future."

Reserve Solutions has marketed its ReservePlus account plans to employers since 2003 and its website says that thousands of individuals are enrolled, although the company is reluctant to be interviewed about the accounts. "There's a lot of negative press about ReservePlus, because when people first hear about this concept they cringe and see it as a terrible thing," says Barry Kublin, president of BPA, an employee benefits firm in Syracuse, N.Y., that offers the accounts to companies it works with. "But there is a need and a market for it and most people who use it don't abuse it."

The average ReservePlus account holder doesn't have a great deal of money saved in regular savings accounts and needs the flexibility the accounts provide, he says. "There's a trade union we work with that has offered these accounts to their members. These people are paid well, but there may be a gap between their jobs. ReservePlus loans are available for their unexpected expenses."

Easy and confidential
The advantage of saving through a 401(k) is that it usually includes a contribution from your employer and can grow tax free until you retire. Most companies allow employees to get a loan from their 401(k) plans; however, the process often isn't easy. There's usually a fee for setting up the loan, there can be a good amount of paperwork and the money may not be available for a couple of weeks.

"It's difficult for a reason," says Pam Hess, director of retirement research for Hewitt Associates, an employee benefits firm based in suburban Chicago. "Employers don't want the additional work of administering these loans and they'd prefer their savings to grow unhindered."

Hewitt's research showed that 22 percent of employees had taken out loans against their 401(k) accounts in 2007. "It's remarkable, but it's a trend that has been going up as of late," says Hess.

A big selling point of ReservePlus, as opposed to traditional loans, is its convenience and confidentiality. "Maybe you don't want it known at work that you're in need of extra money and you don't want to go through the traditional loan process in the human resources office," says Kublin. "A ReservePlus card in your wallet lets you keep your business private."

Payback terms
Whether you have a traditional 401(k) loan or a ReservePlus account, there can be some complications when you leave your employer. "If you have an outstanding loan and you leave the company, you're required to pay it back in 90 days," says Hess. "Otherwise, you'll face a penalty for making an early withdrawal from your 401(k) and it will be classified as income to you by the IRS."

"With ReservePlus, when you leave your employer you're still required to pay back the amount borrowed in 60 months, which gives you flexibility if you're laid off and money is tight," says Kublin.

Overall, Hess says if the economy continues its instability and the amount of requests for employee loans continues to rise, there may be more companies looking for products like ReservePlus cards. "I wouldn't say tapping a 401(k) is something that should never be done, but it should be your last resort."

Published: March 27, 2008


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